Every small-business owner is usually trying to find ways to reduce their income tax bill and write off some of their expenses as tax deductions. Tax deductions are business expenses a sole proprietor, partnerships, limited liability companies, and corporations can deduct from their taxable income. In other words, tax write-offs allow business owners to subtract the amount of the expense from their taxable income as per the IRS guidelines.
Small business owners should discuss the option of tax deductions with tax professionals to make sure they take advantage of the tax benefits available to them and learn how to properly keep their records and itemize expenses. A tax preparer can help you write off not only deductible business expenses but also some expenses related to personal purposes. Here are the ten small business tax deductions you need to know:
1. Mortgage interest
Mortgage interest can be deducted from your income tax if you own a home and have a mortgage. The interest associated with the respective business loan will be subtracted from your taxes. The advantage is that the interest doesn’t necessarily have to be connected with a business loan made to purchase the home. It can also arise from a bank loan made to build a new house or even to cover maintenance costs. Furthermore, the mortgage interest deduction can also be claimed if you want to get a loan for a second residence or vacation home.
2. Real estate taxes
If you own business property, the real estate taxes can be deducted from your income tax. However, this deduction is conditioned by the exclusive use of the respective property for business purposes. You can deduct taxes paid at the state and local levels, but the claim cannot be higher than $10,000.
3. Business property rent
The rent paid for the business location where you conduct your business activities is deductible. This standard tax deduction includes the amount you pay to rent an office space, warehouse space, or land. Individuals who run a sole proprietorship and provide their business services from home while living in a rented property may be eligible for this type of small-business tax deduction but only under certain conditions imposed by the IRS. Discuss this deduction with your tax advisor.
4. Home office expenses
The rent you pay for your home office can be included in the category of home office deductions. Home office expenses include expenses made by small business owners who run their business operations from home. When using the simplified method of accounting for a home office tax deduction, you can deduct $5 per square foot of your home, up to a maximum of 300 square feet. However, if you prefer the standard method, you need to keep an eye on the actual expenses required to maintain your home – mortgage interest or rent, utilities, repairs, housekeeping, etc. and multiply them by the percentage of your home used for business reasons.
5. Office supplies
Your business needs office supplies to run properly and the IRS offers the ability to deduct them from your taxable income. Office supplies include laptops, computers, work-related software, printers, paper, pens, and any other supplies necessary for your business activities. While they may not be high costs, the expenses add up and you shouldn’t ignore them. The only condition you need in order to benefit from this type of business deduction is to use the supplies for business purposes within the year in which they were acquired. Keep the receipts for every office supply purchase and include work-related postage and shipping costs too.
6. Phone and internet expenses
Phone and internet are vital for most small businesses, especially when used from home, so make sure you include them with your other tax-deductible expenses. Keep in mind though that you cannot deduct the expenses associated with the phone service used on your personal landline. You can, however, use a landline exclusively for business purposes, so that you can benefit from a deduction of your business taxes. If your business uses internet service, you can add internet expenses, including internet equipment, to your tax deductions. However, you can only deduct the percentage associated with business use for both phone and internet services. And you need an itemized bill to justify the write-off if your business tax return is ever audited.
7. Car use expenses
Vehicle expenses can be deducted as a business expense only if you use your vehicle for business purposes. Business owners can use their car for both business and personal reasons, but they can deduct only costs associated with the business usage of the vehicle. If you have a business vehicle and plan on deducting car use expenses, you can use either the standard mileage rate or the actual expense method to calculate the amount you can subtract from your taxable income. The current standard mileage rate is $0.585 per mile driven. All you need to do is to multiply the actual mileage covered during the year with the rate. Some business owners prefer the actual expense method that allows them to track all costs incurred by the use of a car for business activities – gas, oil, tires, insurance, repairs, etc. You can choose the method that allows you a greater tax deduction; however, if you use the actual method for a specific business vehicle, you cannot switch back to the standard mileage method. Always keep a detailed record of your business miles. The miles covered between home and regular place of business are NOT deductible. These miles are designated as personal commuting expenses.
8. Travel expenses
Work-related travel expenses include expenses associated with traveling that is necessary for your business. For a trip to qualify as business travel, it has to be away from your tax home – city or area where you operate your business – and has to be longer than a normal day’s work. Travel expenses imply at least one night sleeping en route and may include airfare, hotels, rental car expenses, tips, parking and toll fees, meals, business calls, dry cleaning, and other costs usually incurred during a business trip. Remember to always keep records of all your travel expenses, a mileage log if you use your business vehicle to travel, and details regarding the dates of travel, business reason, etc.
9. Business insurance
Business insurance is essential for small business owners. Fortunately, the premiums associated with business insurance are 100% tax-deductible. Business owners can deduct the entire cost of premiums paid for liability coverage, professional liability insurance, property coverage, workers compensation coverage, and life insurance for employees if the business or business owner is not the beneficiary of the policy. You can also include auto insurance for your business vehicle, as well as group health insurance for employees, and business insurance for business activity interruption.
10. Business meals
Small business owners are allowed to deduct 50 percent of food and drink purchases, as long as the purchase has been made for business purposes. For a meal to be deducted from your taxable income, it needs to be ordinary and necessary for the business activity and the business owner or an employee needs to be present at the meal. An extravagant meal will not be eligible for the deduction, but a company party, picnics, or holiday parties for employees are 100% deductible. Track all your business meals and keep detailed documentation regarding the outing that reflects the cost, date, and place of the meal, as well as the business relationship with the persons who attended the meal.
Discuss your business eligibility for tax deductions with your accountant and make sure you keep a record of the expenses that qualify for tax deductions. Keep an eye out for 100 percent deductible expenses, like office furniture, office equipment, business travel, gifts for clients and employees, and phone bills. If you are self-employed, you can also deduct your own health premiums.